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Frerichs warns of impasse consequences

Friday, Oct 2, 2015

* Your thoughts on this?…

September 30, 2015

The Honorable Bruce Rauner
Governor of Illinois
207 State House
Springfield, IL 62706

Dear Governor Rauner,

I am writing to underscore how the current budget stalemate adversely impacts the Illinois State Treasurer’s Office. Also, it is my responsibility to stress that if a resolution is not reached soon, there may be significant impacts to the state’s ability to pay its bills, run programs, and conduct essential government operations.

As you know, the Illinois Treasurer is the state’s Chief Investment and Banking Officer. Currently, my office manages approximately $23 billion, which includes $10.1 billion in state funds, $7.3 billion in college savings plans, and $5.5 billion on behalf of state agencies and municipalities. The Treasurer’s Office also oversees the Unclaimed Property program, administers the state’s multiple banking functions and financial services, and provides several low-interest loan and financial programs aimed at spurring economic growth, creating jobs, assisting farmers, and enhancing Illinois communities. Our primary focus remains preserving the state’s investment portfolio, providing the necessary liquidity to meet daily cash flow demands, and consistently producing investment earnings that enrich the people and communities of Illinois. To that end, the Treasurer’s Office returns $28 in revenue to the state for every $1 spent on operations.

While my office is committed to fulfilling its duties, the current budget impasse presents significant concerns and challenges that warrant your attention. As we approach the three month point of this budget stalemate, critically important banking and investment contracts remain unpaid which threaten to disrupt operations. If services from these vendors are suspended, there may be devastating effects on the state’s ability to manage its finances, pay its debts, and maximize returns for the people of Illinois.

I want to focus your attention on three specific areas of greatest concern:

1. Disruption of Banking Activities

In order to administer treasury, cash management, and investment operations on behalf of state and local governments, the Treasurer’s Office utilizes a wide variety of financial services and products from outside parties, including brokerage firms, securities dealers, investment consultants, banks, credit unions, and other financial institutions. These entities provide a number of critically important banking and investment services to the Treasurer’s Office. If funds are not available to pay our vendors, banking and financial services that we provide to state agencies may cease, such as: depository services, electronic payments, and lockbox services. State agencies would then not be able to deposit or accept checks, cash, or electronic funds, including federal funds. Further, our office may not be able to make funds available to the Comptroller which would not allow for vendor payments and payroll deposits.

2. Disruption of Investment Operations

Every day, the Treasurer’s Office actively invests and manages monies on behalf of state agencies and local governments. The largest portfolio, the State Portfolio, currently holds assets of approximately $10.1 billion. These monies are managed to provide the necessary liquidity to meet the state’s daily obligations. Remaining funds are placed in authorized short- and long-term investment vehicles.

While the majority of investments in the State Portfolio are positioned for quarter end, the Treasurer’s Office executes a number of daily and short-term trades to ensure sufficient liquidity. These activities could be severely jeopardized by any contractual disruptions. If the Treasurer’s Office is unable to pay contractual fees to banks and they terminate existing contracts and close investment and custodial accounts, our office may be forced to liquidate all investments due to the inability to hold securities with our custodian bank or the Federal Reserve. This may shut down our securities lending program which generates significant incremental income. In addition, security sales may need to be made in order to meet daily liquidity needs, something this office has never been forced to do in its 197-year history.

The Treasurer’s Office may have to sell off $10.1 billion in investments before our bank accounts close. As such, the State of Illinois may lose significant investment earnings and the potential loss of principal depending on market volatility. While it is imprudent to submit an exact figure considering the extensive variables in play, to provide some perspective, consider investment earnings under normal operations:

    • The State Portfolio typically earns $3.5-$5 million in monthly earnings ($4.2 million in August 2015) or $42-$60 million in annual investment earnings.

    • The Treasurer’s Office currently earns approximately $33,000 per day ($800,000 to $1.3 million per month) in securities lending income. If the Treasurer’s Office cannot replace treasury securities or called securities, securities lending income will be adversely impacted.

3. Risks to Agencies Upgrading to Chip-Card Payment Systems

October 1, 2015, is the deadline for organizations that accept credit card payments to adopt a new microchip processing system. Failure to do so may result in a liability shift that renders them financially responsible for fraudulent charges. This applies to state and local government agencies as well. The liability shift compels businesses and organizations to purchase new terminals and software that read E.M.V. (Europay, MasterCard, and VISA) microchips.

The Treasurer’s Office has been working for months with state and local agencies to prepare for this transition to newer technology. However, there may be agencies that are not ready for this transition as they lack the appropriation authority to purchase the required terminals. This is unnecessarily exposing the state to risks and could create a significant liability for already stretched government agencies.

The Treasurer’s Office will continue to work to forestall these impacts while considering contingencies if our vendors discontinue services. My office will keep you abreast of any pertinent developments, and should you have any questions, please do not hesitate to contact us.

Thank you for your time and attention to these important matters.


Michael W. Frerichs
Illinois State Treasurer

Cc: Senate President John Cullerton
House Speaker Michael Madigan
Senate Republican Leader Christine Radogno
House Republican Leader Jim Durkin
Lieutenant Governor Evelyn Sanguinetti
Attorney General Lisa Madigan
Secretary of State Jesse White
Comptroller Leslie Geissler Munger

- Posted by Rich Miller        

  1. - Frenchie Mendoza - Friday, Oct 2, 15 @ 10:06 am:

    Sure, it sounds bad. But I suspect — as I said previously — Rauner doesn’t care. He doesn’t read the new, so none of this really impacts him.

    What he cares about is decimating unions. This is all short-term hassle stuff. It’ll pass.

  2. - walker - Friday, Oct 2, 15 @ 10:06 am:

    Sorry Frerichs, White beat you to it.

    Will Munger be far behind, given that she is also an independent Constitutional officer? She must have unpaid bills to critical vendors.


  3. - Frenchie Mendoza - Friday, Oct 2, 15 @ 10:07 am:

    “read the news”, I mean.

  4. - The unknown poster - Friday, Oct 2, 15 @ 10:08 am:

    BVR to superstars……Michael who?

  5. - ihpsdm - Friday, Oct 2, 15 @ 10:09 am:

    I’ve lost hope that anything will get through to Rauner. I can’t even begin to imagine what would break this impasse.

  6. - Frenchie Mendoza - Friday, Oct 2, 15 @ 10:10 am:

    Interesting, though. It’s bad this budget cycle — but next year? I suspect the next year — the next three years — will be more of this — but worse.

    It’s going to take the state many years to recover from this obviously willful destruction.

  7. - Anonin' - Friday, Oct 2, 15 @ 10:15 am:

    Dear Mikey
    Thanks for you note. I once a bank in Atlanta
    paid some sweet dividends til our subprime loans ate us up. But we duked the bank prexey with $500K, gave gift cards to the other dopes and blew town. I’ll check with Mr. ReBoot and Uline to see if they got good bank deals here

  8. - Wordslinger - Friday, Oct 2, 15 @ 10:20 am:

    What budget stalemate? The governor has made it clear he will not even discuss the budget until certain conditions are met.

    It is not a top priority for him.

  9. - RetiredStateEmployee - Friday, Oct 2, 15 @ 10:24 am:

    “Nothing to see here. Please disperse. Nothing to see here.” Lt. Frank Drebin aka GVR

  10. - Nick Name - Friday, Oct 2, 15 @ 10:33 am:

    Better have a Superstar post an insulting Tweet. That’ll learn ‘im.

  11. - Tournaround Agenda - Friday, Oct 2, 15 @ 10:43 am:

    The economic damage this is causing will take years to fix. Unless destroying the unions is going to instantly infuse the Illinois economy with trillions of dollars, it’s time to take what victories you can and get a budget passed. Now.

  12. - Pelonski - Friday, Oct 2, 15 @ 10:48 am:

    My thoughts are that this letter and the letter from the Secretary of State are support for the “I told you so” statements later when problems actually start to occur. I don’t think either give us a clear picture of the current risk of disruptions. Some critical vendors may never cut the State off, and others may be in the process of doing that right now.

  13. - Anon221 - Friday, Oct 2, 15 @ 10:50 am:

    The letter is not just for the Gov or the others listed on the cc. Either through this blog or other means, I’m sure the GA members will also become aware of its existence.

    IMO- Both sides of the GA are going to have to come to terms and to majorities to marginalize Rauner. They are being given the wood for the fire, it will be up to them to strike the match.

  14. - Six Degrees of Separation - Friday, Oct 2, 15 @ 10:50 am:

    I’ve lost hope that anything will get through to Rauner. I can’t even begin to imagine what would break this impasse.

    A Katrina-size disaster? /s

  15. - A Jack - Friday, Oct 2, 15 @ 11:37 am:

    I suspected that the other Constitutional officers would need to get involved to try to break the impasse.

    I think it will have to be the SOS though. He isn’t running again and can afford the fallout. Plus he provides a great many services to the public.

    I am glad the Treasurer spoke up. But given his narrow win and the low level of public interaction of his office, I don’t see much chance of breaking the impasse coming from that direction.

  16. - VanillaMan - Friday, Oct 2, 15 @ 12:50 pm:

    Frerichs is doing what he likes to do - grandstand.

  17. - anon - Friday, Oct 2, 15 @ 1:01 pm:

    Concern #3 is a scare tactic. The liability shift only occurs if a consumer presents an EMV card. EMV cards constitute less than .02% of all US issued credit cards.

  18. - enoughalready - Friday, Oct 2, 15 @ 2:02 pm:

    Rauner: That is a lucid, intelligent, well thought-out objection.
    Frerichs: Thank you, Your Honor.
    Rauner: Overruled.

  19. - SourKraut - Friday, Oct 2, 15 @ 2:42 pm:

    OK, admit I am not down with all the terms used by the players here, so here goes….just who are the “superstars” and why are they referred to as such? Be gentle LOL.

  20. - Dome Gnome - Friday, Oct 2, 15 @ 2:42 pm:

    That’s right, lucid just doesn’t fly.

  21. - uptown progressive - Friday, Oct 2, 15 @ 3:18 pm:

    “Frerichs is doing what he likes to do - grandstand.” -VM. It seems to me that reporting on the impact to the state’s banking relationships is his job. Is he inaccurate in what he is saying?

  22. - Anonymous - Friday, Oct 2, 15 @ 3:31 pm:

    Go ahead Gov. its like a house of cards.

  23. - View from the Cheap Seats - Friday, Oct 2, 15 @ 3:44 pm:

    Where has he been all year?

  24. - Robert the Bruce - Friday, Oct 2, 15 @ 4:00 pm:

    Jesse White’s letter was much better. More timely, more specific, and less partisan.

    Wishful thinking, I know, but I’d love to see one of the constitutional officeholders offer to host budget/turnaround agenda talks with Rauner and the legislative leaders.

  25. - Arthur Andersen - Friday, Oct 2, 15 @ 4:40 pm:

    Drone on, Mike. Once you voted to keep Big Ed Smith’s crappy investment on the books at ISBI, your true colors were again revealed.

Sorry, comments for this post are now closed.

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